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Dubai Financial Services Authority (DFSA): Contents

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Apr 1 2015 - Jul 31 2017Aug 1 2017 onwards

COB 2.2 Guidance



Whole Section PDF

The definitive version of DFSA handbook text is the PDF version as that is the text of the instrument as made and published by the DFSA.

To view past versions of this module in PDF format, please visit the Archive.

1. This chapter sets out the manner in which an Authorised FirmG is required to classify its ClientsG , as well as good practice it may follow. The scope of application of the Rulebook modules will vary depending on whether the PersonG with or for whom an Authorised FirmG is carrying on Financial ServicesG is classified as a Retail ClientG , Professional ClientG or Market CounterpartyG .

Risk based approach

2. The Rules in this chapter reflect the DFSA's risk based approach to regulation. Therefore, to achieve the underlying objective of client classification, which is to ensure that firms provide to their clients an appropriate level of regulatory protection, the Rules, for example:
a. take into account the higher degree of knowledge and experience ('expertise') and resources available to certain institutional and wholesale clients (see Rule 2.3.4);
b. take into account who primarily bears the risk associated with a particular type of a Financial ServiceG (see Rule 2.3.5);
c. take into account the type of PersonsG to whom a Financial ServiceG is usually provided (see Rules 2.3.6, 2.3.7 and 2.3.8);
d. provide flexibility for an Authorised FirmG to rely on a client classification made by its head office or a GroupG member, provided risks associated with such reliance are effectively addressed (see Rules 2.4.4 and 3.3.4);
e. provide flexibility for group-based Financial ServicesG to be provided where risks associated with such services are effectively addressed (see Rule 2.4.5); and
f. provide flexibility for look-through arrangements where reliance can be placed on expertise and resources available to a ClientG , such as at its Holding CompanyG or controller level (see Rule 2.3.8(2)).

Types of clients

3. There are three types of ClientsG :
a. a Retail ClientG ;
b. a Professional ClientG ; or
c. a Market CounterpartyG .
However, a PersonG may be classified as a Professional ClientG in relation to one Financial ServiceG or financial product, but a Retail ClientG in relation to another. Similarly, a PersonG classified as a Professional ClientG may be classified as a Market CounterpartyG in relation to some Financial ServicesG or financial products but not others (see paragraphs 8 and 9 below).

Retail clients

4. A PersonG who cannot be classified as a Professional ClientG or Market CounterpartyG in accordance with the Rules is required to be classified as a Retail ClientG (see Rule 2.3.2). If an Authorised FirmG chooses to provide Financial ServicesG to a PersonG as a Retail ClientG , it may do so by simply classifying that PersonG as a Retail ClientG without having to follow any further procedures as required for classifying PersonsG as Professional ClientsG or Market CounterpartiesG .

Professional Clients

5. There are three routes through which a PersonG may be classified as a Professional ClientG :
a. 'deemed' Professional ClientsG under Rule 2.3.4. As these PersonsG have significant assets under their control, and, therefore, either possess, or have the resources to obtain, the necessary expertise to manage such assets, they can be classified as 'deemed' Professional ClientsG without having to meet any additional net asset and expertise criteria;
b. 'service-based' Professional ClientsG under Rule 2.3.5, Rule 2.3.6 or Rule 2.3.6A. Due to their inherent nature, certain Financial ServicesG activities such as credit provided to an UndertakingG for business purposes ('commercial credit'),. . . advisory and arranging activities relating to corporate structuring and financing and crowdfunding services provided to a Body CorporateG that is a borrower or an IssuerG , are generally provided to PersonsG with sufficient expertise to obtain such services or are of relatively low risk to the Client. Therefore, a PersonG to whom such a Financial Service is provided can be classified as a 'service-based' Professional ClientG ; and
c. 'assessed' Professional ClientsG under Rules 2.3.7 and 2.3.8. These PersonsG are either individuals or Undertakings which can be classified as a Professional ClientG only if they meet the specified net assets and expertise requirements set out in Rules 2.4.2 and 2.4.3.
Investment vehicles and family member joint account holders of individuals who are themselves Professional ClientsG can also be classified as Professional ClientsG where certain conditions are met — see Rule 2.3.7(2) and (3).

Market Counterparties

6. A 'deemed' Professional ClientG under Rule 2.3.4 may be classified as a Market CounterpartyG provided the Authorised FirmG has complied with the procedures set out in Rule 2.3.9(2). When an Authorised FirmG carries on Financial ServicesG with a Market CounterpartyG , only a limited number of requirements in the Rulebook modules apply to such firms. This is because an Authorised FirmG transacts with a Market CounterpartyG on an equal footing and, therefore, most of the client protection provisions in the Rulebook modules are not needed to protect such a party.
7. When an Authorised FirmG carries on Financial ServicesG with another Authorised FirmG or a Regulated Financial InstitutionG , such services would generally qualify as Financial ServicesG that can be carried on with a Market CounterpartyG (provided the procedures in Rule 2.3.9(2) are met). Examples of such services include:
a. providing reinsurance or insurance management services to an insurer; and
b. providing one or more Financial Services of custody, managing assets, or fund administration services to a fund manager, collective investment fund or a pension fund.
Such activities would not attract most of the client protection provisions contained in the Rulebook modules for the reasons set out under item 6 above.

Multiple classifications

8. In some circumstances, an Authorised FirmG may provide a Financial ServiceG to a PersonG who qualifies under more than one category of Professional ClientG . For example, a ClientG to whom an Authorised FirmG provides commercial credit or corporate structuring and financing advice or arranging credit, in the circumstances specified in Rule 2.3.5 or Rule 2.3.6, may also be a 'deemed' Professional ClientG under Rule 2.3.4. In such circumstances, an Authorised FirmG can classify such a PersonG as a 'deemed' Professional ClientG , in which case the firm may also be able to classify that ClientG as a Market CounterpartyG following the procedures in Rule 2.3.9(2).
9. It is also possible that an Authorised FirmG may provide a range of Financial ServicesG to a single ClientG . If the ClientG can be classified as a Professional ClientG with regard to certain Financial ServicesG (such as Providing CreditG under the requirements in Rule 2.3.5, and similarly providing corporate structuring and financing advice or arranging credit under Rule 2.3.6), and not so with regard to other Financial ServicesG , an Authorised FirmG needs to take care that the ClientG is appropriately and correctly classified with respect to each Financial ServiceG . This may mean that the same ClientG may receive both Professional ClientG treatment with regard to some Financial ServicesG and Retail ClientG treatment with regard to other Financial ServicesG . Where a ClientG cannot be classified as a Professional ClientG with regard to some Financial ServicesG , the Authorised FirmG can only provide such services to the ClientG if it has a Retail EndorsementG on its LicenceG .

Client classifications and Client Agreements

10. Rule 2.4.4 provides a degree of flexibility for an Authorised FirmG which is a BranchG operation or member of a Group to rely on client classifications made by its head office or any other branch of the same legal entity, or by a member of its GroupG . Where such reliance is placed, the Authorised FirmG should be able to demonstrate to the satisfaction of the DFSAG that the reliance is reasonable because the applicable requirements are substantially similar and, where this is not the case, any identified differences (i.e. gaps) are suitably addressed to enable the firm to meet its obligations relating to client classification under this chapter.
11. It is also possible that an Authorised FirmG which is a member of a GroupG may have some ClientsG to whom it provides Financial ServicesG as a Retail ClientG , whilst other GroupG members may provide Financial ServicesG to the same ClientG as a Professional ClientG . While an Authorised FirmG may rely on the client classifications made by a GroupG member under Rule 2.4.4, it is the responsibility of the firm to ensure that the correct classification is adopted by it for the purposes of the Financial ServicesG it provides to the ClientG (see Rule 2.4.4). See also Rule 3.3.4, which provides a degree of flexibility for an Authorised FirmG which is a BranchG to rely on a Client AgreementG made by its head office or any other branch of the same legal entity, or by a member of the GroupG , provided the requirements in that Rule are met.

Group clients

12. Rule 2.4.5 is designed to provide a greater degree of flexibility to an Authorised FirmG providing Financial ServicesG to a ClientG in a GroupG context, where more than one member of the GroupG may be providing Financial ServicesG which form a bundle of services. Each GroupG may have different arrangements to provide a number of services to a ClientG . Depending on the nature of the arrangement the GroupG adopts, and the Financial ServicesG involved, risks associated with such arrangements could also differ. Therefore, Rule 2.4.5 sets out the outcomes which need to be achieved by an Authorised FirmG where it participates in a GroupG arrangement under which a bundle of Financial ServicesG is provided to a ClientG by different members within its GroupG . See also Rule 3.3.4, which provides a degree of flexibility for an Authorised FirmG participating in an arrangement under which a bundle of Financial ServicesG is provided to a ClientG where reliance can be made on a Client AgreementG executed by a GroupG member, provided the requirements in that Rule are met.

Transitional Rules

13. Section 2.6 contains provisions designed to enable Authorised FirmsG to make a smooth transition to the new client classification regime that came into force on 1 April 2015. These Rules, among other things:
a. keep in force the client classifications made under the old client classification regime for the Financial ServicesG that were provided to those ClientsG under that regime;
b. provide for the increased asset threshold of $1 million to come into effect on 1 April 2016; and
c. retain the asset threshold at $500,000 until 1 April 2016.
Derived from DFSA RM149/2015 (Made 11th February 2015) [VER24/04-15]
[Amended] DFSA RMI202/2017 (Made 14th June 2017). [VER29/08-17]